Bank Of Georgia Group Regulatory News (BGEO)

Bank of Georgia

Group PLC

Third quarter and first nine months 2018 results

Name of authorised official of issuer responsible for making notification:

Natia Kalandarishvili, Head of Investor Relations and Funding

www.bankofgeorgiagroup.com

About Bank of Georgia Group PLC

The Group: Bank of Georgia Group PLC ("Bank of Georgia Group" or the "Group" - LSE: BGEO LN) is a UK incorporated holding company, the new parent company of BGEO Group PLC. The Group combined a Banking Business and an Investment Business prior to the Group demerger on 29 May 2018, which resulted in the Investment Business's separation from the Group effective from 29 May 2018.

The Group comprises: a) retail banking and payment services, b) corporate investment banking and wealth management operations, and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("Bank of Georgia", "BOG" or the "Bank"), the leading universal bank in Georgia, is the core entity of the Group. The Group targets to benefit from superior growth of the Georgian economy through both its retail banking and corporate investment banking services and aims to deliver on its strategy, which is based on at least 20% ROAE and 15%-20% growth of its loan book.

FORWARD LOOKING STATEMENTS

This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Bank of Georgia Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: currency fluctuations, including depreciation of the Georgian Lari, and macroeconomic risk; regional tensions and instability; loan portfolio quality; regulatory risk; liquidity risk; operational risk, cyber security, information systems and financial crime risk; and other key factors that indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports of the Group, including the 'Principal Risks and Uncertainties' included in Bank of Georgia Group PLC 2Q18 and 1H18 results announcement and in BGEO Group PLC's Annual Report and Accounts 2017. No part of this document constitutes, or shall be taken to constitute, an invitation or inducement to invest in Bank of Georgia Group PLC or any other entity within the Group, and must not be relied upon in any way in connection with any investment decision. Bank of Georgia Group PLC and other entities within the Group undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast.

CONTENT

Bank of Georgia Group PLC announces the Group's third quarter 2018 and first nine months 2018 consolidated results. Unless otherwise noted, numbers are for 3Q18 and comparisons are with 3Q17. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

On 29 May 2018, the demerger of Bank of Georgia Group PLC's Investment Business to Georgia Capital PLC became effective. The results of operations of the Investment Business prior to demerger, as well as the gain recorded by the Group as a result of the Investment Business distribution are classified under the "discontinued operations" line as a single amount in the consolidated income statement. In line with IFRS, comparative periods have been accordingly restated to reflect the reclassification of the Investment Business from "continuing operations" into "discontinued operations"

HIGHLIGHTS

Continued outstanding profitability and solid balance sheet growth momentum

Georgian economy remains resilient to external developments

GDP growth reached 4.9% in 9M18 supported by an increase in goods exports, tourism arrivals, and remittances. Banking sector credit expansion also supported economic activity, while deposit and loan dollarisation continued to decline. Annual inflation fell to 2.7% in September 2018 and is expected to remain close to the National Bank of Georgia's 3.0% target for the full year. The NBG has been accumulating foreign currency reserves throughout the year with the level reaching US$ 3.2 billion, a record high, at the end of September 2018. Georgia improved its ranking to 6th globally in the World Bank's 2019 Doing Business report, reflecting continued emphasis on regulatory improvements. Exchange rate flexibility and prudent macroeconomic policies continue to serve the economy well, demonstrating resilience towards negative shocks coming from the recent depreciation of the Turkish Lira, and volatility on regional financial markets

1 2Q18 and 9M18 results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

2 The Group completed its IFRS 9 implementation programme and adopted 'IFRS 9, Financial Instruments' standard from 1 January 2018. As allowed by IFRS 9, the Group did not restate prior-period data, therefore, comparatives are presented on an IAS 39 basis. In addition, throughout this Announcement, the gross loans to customers and respective allowance for impairment are presented net-of expected credit loss (ECL) on contractually accrued interest income. These do not have an effect on the net loans to customers balance. Management believes that netted-off balances provide the best representation of the Group's loan portfolio position

3 As of 30 September 2018, loans and finance lease receivables grew on a constant currency basis by 21.5% y-o-y and 3.9% q-o-q

4 As of 30 September 2018, client deposits and notes increased on a constant currency basis by 16.9% y-o-y and 6.0% q-o-q

RESULTS HIGHLIGHTS

§ Strong quarterly performance. Profit before non-recurring items and income tax totalled GEL 117.1mln in 3Q18 (up 15.7% y-o-y and down 2.5% q-o-q) and GEL 348.3mln during the first nine months of 2018 (up 23.5% y-o-y), while profitability remained high with 25.8% ROAE5 in 3Q18 (up 70bps y-o-y and up 60bps q-o-q) and 25.7% in 9M18 (up 140bps y-o-y)

§ Solid Asset quality. NPLs to gross loans ratio was 3.0% at 30 September 2018 (4.1% at 30 September 2017 and 3.0% at 30 June 2018). NPL coverage ratio stood at 102.9% at 30 September 2018 (110.5% at 30 June 2018), while the NPL coverage ratio adjusted for discounted value of collateral stood at 141.4% at 30 September 2018 (147.2% at 30 June 2018). At the same time, the cost of risk ratio was 2.2% in 3Q18, 2.0% adjusted for currency devaluation impact (2.0% in 3Q17 and 1.7% in 2Q18) and 2.0% in 9M18 y-o-y (down from 2.2% in 9M17)

§ The loan book growth reached 25.5% y-o-y and 8.0% q-o-q at 30 September 2018. Growth on a constant-currency basis was 21.5% y-o-y and 3.9% q-o-q. Retail Banking loan book share in the total loan portfolio was 69.6% at 30 September 2018 (68.4% at 30 September 2017 and 70.1% at 30 June 2018)

§ Retail Banking ("RB") continued to deliver solid growth across its business lines. Retail Banking revenue reached GEL 183.6mln in 3Q18, up 17.9% y-o-y and up 2.5% q-o-q, with the first nine months 2018 revenue totaling GEL 533.5mln, up 21.6% y-o-y. The Retail Banking net loan book reached GEL 5,787.1mln at 30 September 2018, up 27.4% y-o-y and up 7.5% q-o-q. The growth on a constant-currency basis was 24.1% y-o-y and 4.2% q-o-q and was predominantly driven by mortgage lending as a result of the Bank's concentrated effort to grow this business following the recent and upcoming regulatory changes. The number of Retail Banking clients reached 2.4mln at the end of 3Q18, up 6.8% from 2.3mln at the end of 3Q17 and up 1.1% from 2Q18

§ Retail Banking client deposits increased to GEL 4,030.0mln at 30 September 2018, up 40.4% y-o-y and up 15.8% q-o-q. Growth on a constant-currency basis was 35.1% y-o-y and 10.6% q-o-q

§ Corporate Investment Banking ("CIB") continued further growth in 9M18 after delivering on its risk de-concentration and loan portfolio repositioning targets in 2017. CIB's net loan book reached GEL 2,478.9mln at 30 September 2018, up 24.3% y-o-y and up 10.1% q-o-q. The growth on a constant-currency basis was 19.0% y-o-y and 4.5% q-o-q. The top 10 CIB client concentration was 9.9% at the end of 3Q18 (10.4% at 30 September 2017 and 10.2% at 30 June 2018)

§ Investment Management's Assets Under Management ("AUM") increased to GEL 2,180.1mln in 3Q18, up 19.9% y-o-y and up 9.3% q-o-q, reflecting increase in client assets and bond issuance at Galt & Taggart, our brokerage subsidiary

§ De-dollarisation of the loan book and clients deposits. Loan book in local currency accounted for 39.3% of the total book at 30 September 2018, compared to 38.7% a year ago and 41.7% in the previous quarter. The dollarisation of our loan book has been decreasing since last year as the demand for local currency denominated loans was stronger than the demand for foreign currency denominated loans, supported by the Government's de-dollarisation initiatives implemented at the beginning of last year and our goal to increase the share of local currency loans in our portfolio. However, on the back of the tighter regulation for unsecured consumer lending and as a result of the devaluation of the local currency during 3Q18, dollarisation level of the loan book increased q-o-q. At the same time, client deposits in local currency represented 34.4% of the total deposit portfolio at 30 September 2018, compared to 31.2% at 30 September 2017 and 37.9% at 30 June 2018

§ Digitalisation. We actively continue further development of our digital channels by introducing new features to both our mobile banking application and our internet bank on a quarterly basis. At the same time, we are introducing dedicated digital spaces in our branches to increase client penetration and incentivise offloading to digital channels. As a result, the number of active mobile and internet banking users in 3Q18 reached 494,315 (up 4.6% q-o-q). Both the number and volume of transactions through our mobile and internet banking continued to expand at 18.3% and 24.3% q-o-q, respectively. c.78% of total daily banking transactions were executed through digital channels in 3Q18

§ Bank of Georgia continued to attract local currency funding to further support the increased demand for local currency lending and the de-dollarisation of its loan book. In July 2018, the Bank raised GEL 160mln local currency financing with a maturity of five years from Nederlandse Financierings - Maatschappij Voor Ontwikkelingslanden N.V. (FMO)

5 2Q18 and 9M18 ROAE adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances

CHIEF EXECUTIVE OFFICER'S STATEMENT

The Group has delivered another quarter of strong balance sheet expansion and superior profitability, with good franchise growth and returns in both the retail and corporate investment banking businesses, despite an impact on the business from the Georgian Lari's 6.7% depreciation against the US Dollar during the third quarter.

In the third quarter, the Banking Business delivered revenue of GEL 266.6 million, up 19.4% year-on-year, and profit from continuing operations of GEL 104.5 million, an increase of 13.7%. Profit before non-recurring items and income tax totaled GEL 117.1 million, a 15.7% increase year-on-year. In the first nine months of 2018, revenues totaled GEL 755.5 million, an increase of 16.4% and profit before non-recurring items and income tax increased by 23.5% to GEL 348.3 million. The Return on Average Equity continues to improve, and in the third quarter increased to 25.8%, from an adjusted ROAE of 25.2% in the previous quarter.

From a macroeconomic perspective, Georgia delivered a strong real GDP growth, estimated at 4.9% during the first nine months of 2018, with inflation well contained at 2.7% in September 2018. Inflation is expected to remain close to the National Bank of Georgia's target of 3.0% for the year. The Government's prudent macroeconomic policies continue to serve the country well, and the economy has remained resilient to the recent depreciation of the Turkish Lira and volatility in regional financial markets. Foreign Direct Investment continues to flow into a wide variety of sectors, and tourist numbers - the most significant driver of US$ inflows for the country - continue to rise strongly, with tourism revenues totaling $2.6 billion in the first nine months of the year. The National Bank of Georgia has continued to buy US dollars. During the first nine months of 2018, NBG bought approximately $113 million, leading to Georgia's US dollar reserves improving to a record level of $3.2 billion at the end of September 2018.

Bank of Georgia delivered another strong quarter. Strong franchise growth in Retail Banking was the driver of third quarter year-on-year revenue growth of 17.9%, supported by customer lending growth of 27.4% year-on-year, and 7.5% quarter-on-quarter. On a constant currency basis, customer lending growth was still strong at 24.1% year-on-year, and 4.2% quarter-on-quarter. The Retail Bank's clear focus over the last few months has been on growing the mortgage and SME portfolios more rapidly than the unsecured consumer lending portfolios, and loan originations in these portfolios have been particularly strong. In the third quarter of 2018, the mortgage and SME portfolios grew by 16.6% and 10.8%, respectively. This is a robust performance that has resulted from targeted and capital efficient lending campaigns.

The Retail Banking client base continues to grow strongly reflecting the success of the Bank's digital penetration growth and the increased use of more cost effective remote channels. As a result, the Retail Bank now has more than 2.4 million customers, an increase of nearly 7% over the last twelve months. Our fully transformed, user-friendly, multi-feature mobile banking application, mBank, has now had nearly half-a million downloads in less than 16 months, and performed almost 14 million online transactions over the same period. In addition, we have now comfortably exceeded our targeted 40,000 Solo clients by the end of 2018, with over 41,700 clients already benefiting from Solo's concierge-style banking proposition.

We have made strong progress in Corporate Investment Banking business, and lending growth is now more balanced between retail and corporate banking. Customer lending in CIB grew 24.3% year-on-year, and 10.1% quarter-on-quarter. On a constant currency basis, these growth rates were 19.0% and 4.5% respectively. In addition, we have also made further progress in reducing concentration risk in CIB, and have reduced the concentration of our top 10 corporate borrowers to only 9.9% of our lending portfolio. This lending growth in CIB has also supported much improved net fee and commission income which, during the first nine months of 2018, increased by 17.1%, and has supported a 21.4% growth in profit before non-recurring items and income tax in CIB.

Whilst individual product loan yields have continued to remain stable, our increasing focus on lending in the mortgage segment and to finer margin corporate and SME clients, has led to a negative mix effect on the net interest margin, which was reduced by 50 basis points quarter on quarter to 6.4%. This shift in product mix, which we expect to continue, improves our asset quality metrics and, particularly in the case of the mortgage portfolio, reduces the risk-asset and capital intensity of our lending growth, which has enabled us to continue to improve the Bank's return on equity and superior profitability profile. Costs remain well controlled, and the Banking Business delivered positive operating leverage whilst continuing to invest in our strong customer franchise. The Bank has recently introduced a "lean" project, which has already started to improve back office procedures, and introduce end-to-end process optimisation in the mortgage business. Over the last twelve months, the cost/income ratio has improved from 38.2% to 36.4% in the third quarter of 2018, and we expect the lean project to ensure further positive operating leverage is achieved, leading to ongoing improvements in the cost/income ratio. The Return on Average Equity also improved and stood at 25.8% and 25.7% in the third quarter and the first nine months of the year, respectively, compared to 24.3% in the first nine months of 2017.

The annualised cost of risk ratio in the third quarter was 2.2%, slightly higher than our medium term cost of risk expectations as a result of the impact of the depreciation of the Georgian Lari against the US Dollar in the quarter, which increased the quarterly cost of risk by 20 basis points. Overall asset quality remains very good, and the NPLs to gross loans ratio was flat at 3.0% during the quarter, and 110 basis points lower than a year ago. Coverage ratios remain robust, and we expect asset quality and credit metrics to remain strong over the medium-term, particularly as our product mix shifts more towards higher quality lending portfolios such as the mortgages.

The Group's capital and funding position remains strong, with capital being held both in the regulated Banking Business and at the holding company level. Within the Bank, the NBG (Basel III) Capital Adequacy ratio was 15.9%, and the Tier 1 Capital Adequacy ratio was 11.0%, a reduction quarter-on-quarter reflecting the payment of the annual dividend to shareholders during the quarter. We continue to generate high levels of internal capital as a result of both the Bank's high return on average equity, and the improved risk asset intensity of our lending growth.

Over the last few months, the National Bank of Georgia has been working with banking sector participants to create a greater focus on dedollarisaion as well as lending to corporate and SME clients, and in the mortgage sector as opposed to the unsecured consumer sector. Within this policy, there are two regulatory initiatives expected to be implemented early next year: the NBG's Retail Lending Guidelines include updated caps on payment-to-income (PTI) and loan-to-value (LTV) ratios and an increase in the GEL 100,000 limit, to GEL 200,000, below which lending must be issued to individuals in GEL.

During November 2018, the Bank entered into a preliminary agreement with Cartu International Charity Fund to sell a part of the Bank's overdue loan portfolio to the Fund. The transaction includes a portfolio of approximately GEL 200mln of a small-size (up to GEL 2,000 balance) unsecured retail loans, which fell overdue prior to 1 January 2018. The majority of these loans have already been fully provided and written off from the Bank's balance sheet. The transaction is a part of the country-wide, Cartu Fund-led debt relief initiative, facilitated by the government with the participation of all major financial institutions. We expect the agreement to be finalised by the end of this year and to have no material impact on our financials.

As a result of the recent policy changes, we anticipate growth rates in the unsecured consumer sector will moderate, although we continue to expect to deliver solid growth in mortgages and SME lending, as we demonstrated in the third quarter. Overall, with the strong rates of growth already delivered this year, we now expect customer lending growth for the 2018 full year to be comfortably within our 15-20% growth target, with lending growth expectations over the next few years to be closer to 15%.

Our overriding priority is our focus on profitability, and we are continuing to deliver a return on equity comfortably ahead of our targeted "at least 20%" ROAE. I expect further de-dollarisation of our lending book and strong growth in more capital efficient mortgage lending to continue to enable us to deliver superior returns within the Georgian banking sector, which will be supported over the next few years by many of the Government's economic growth initiatives. Our clear objective is to maintain our successful approach to strong, capital efficient, lending growth and superior profitability.

Kaha Kiknavelidze,

CEO, Bank of Georgia Group PLC

22 November 2018

FINANCIAL SUMMARY

6 Banking Business and Discontinued Operations financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 21, 22 and 23

7 2Q18 and 9M18 results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

8 Banking Business and Discontinued Operations financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 21, 22 and 23

9 The y-o-y decline in Book value per share as at 30 September 2018 is driven by the demerger of Investment Business to Georgia Capital PLC on 29 May 2018 and the issuance and allotment of additional 9,784,716 Bank of Georgia Group shares (equivalent to 19.9% of Bank of Georgia Group's issued ordinary share capital) to Georgia Capital

10 2Q18 and 9M18 results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

DISCUSSION OF RESULTS

The Group's business is primarily comprised of three segments. (1) Retail Banking operations in Georgia principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfer and settlement services, and handling customers' deposits for both individuals as well as legal entities. Retail Banking targets the emerging retail, mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate Investment Banking comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus.

Performance highlights

§ Strong revenue of GEL 266.6mln in 3Q18 (up 19.4% y-o-y and up 5.6% q-o-q), ending the first nine months 2018 with revenue of GEL 755.5mln (up 16.4% y-o-y). Y-o-y revenue growth was primarily driven by an increase in net interest income, which resulted from strong loan book growth. Additionally, net fee and commission income, net foreign currency gain, and net other income all contributed to growth in revenues

§ Our NIM was 6.4% in 3Q18 and 6.8% in 9M18. 3Q18 NIM was down 90bps y-o-y due to the 80bps y-o-y decrease in loan yield, largely reflecting our shift towards a higher quality, finer margin product mix and tighter conditions for unsecured consumer lending, and 20bps y-o-y increase in cost of funds. On a q-o-q basis, loan yield decreased by 50bps, while cost of funds remained flat, resulting in 50bps decline in 3Q18 NIM q-o-q. On a nine months basis, loan yield was down 40bps and cost of funds was up 30bps y-o-y, resulting in 50bps y-o-y decline in 9M18 NIM

§ Loan yield. Currency blended loan yield was 13.5% in 3Q18 (down 80bps y-o-y and down 50bps q-o-q) and 13.8% during first nine months of 2018 (down 40bps y-o-y). The y-o-y decline in loan yields during third quarter and on a nine months basis, was attributable to decrease in both local and foreign currency loan yields, while q-o-q decline was due to decrease in local currency loan yields, primarily reflecting the change in product mix in the loan portfolio

§ Liquid assets yield. Our liquid assets yield was 3.8% in 3Q18 (up 30bps y-o-y and flat q-o-q) and 3.7% in 9M18 (up 30bps y-o-y). The main contributor to y-o-y trend was the increase in foreign currency denominated liquid assets yield (up 20bps y-o-y in 3Q18 and up 50bps y-o-y in 9M18), reflecting the Federal Open Market Committee's decisions to raise interest rates, which triggered similar increases on interest rates paid by a) The National Bank of Georgia (the "NBG") on the Bank's obligatory reserves (foreign currency only) and b) correspondent banks on deposits placed by the Bank. However, starting from 12 July 2018, NBG reduced interest rates on foreign currency obligatory reserves (from US Fed rate minus 50bps to Fed rate minus 200bps, floored at zero for US Dollar reserves, and from ECB rate minus 20bps to ECB rate minus 200bps, floored at negative 60bps for EUR denominated reserves), which caused the foreign currency denominated liquid asset yields to drop by 40bps on q-o-q basis in 3Q18

§ Cost of funds. Cost of funds stood at 5.0% in 3Q18 (up 20bps y-o-y and flat q-o-q) and at 5.0% in 9M18 (up 30bps y-o-y). Y-o-y increase both in 3Q18 and 9M18 periods was primarily driven by an increase in the cost of amount due to credit institutions (up 90bps y-o-y in 3Q18 and up 70bps y-o-y in 9M18) as a result of increased local currency denominated borrowings from DFIs, and an increase in the Libor rate during the period. In addition, y-o-y increase in cost of funds in 9M18 also reflected the increase in cost of debt securities issued, following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 60bps y-o-y in 9M18)

§ Net fee and commission income. Net fee and commission income reached GEL 39.5mln in 3Q18 (up 19.1% y-o-y and up 4.3% q-o-q) and GEL 111.8mln during first nine months 2018 (up 18.1% y-o-y). The growth was mainly driven by the strong performance in our settlement operations supported by the success of our Retail Banking franchise

§ Net other income. Net other income increased to GEL 7.4mln in 3Q18 and GEL 16.9mln during the first nine months of 2018, largely driven by net gains from derivative financial instruments and net gains on investment securities recorded during the periods

§ Operating expenses increased to GEL 97.1mln in 3Q18 (up 13.8% y-o-y and up 4.3% q-o-q) and to GEL 277.7mln during first nine months of 2018 (up 14.2% y-o-y). The growth in revenues outpaced the growth in operating expenses both during 3Q18 and 9M18, leading to positive operating leverage during 9M18. Salaries and employee benefits were largely flat in 3Q18 q-o-q, while administrative expenses increased by 14.5% q-o-q, primarily driven by increased costs on consultancy services in relation to the "lean" project on achieving a step-change in operating efficiency, customer experience, and culture

§ Cost of risk ratio. The cost of risk ratio was 2.2% in 3Q18, up 20bps y-o-y and up 50bps q-o-q. RB's 3Q18 cost of risk ratio was up 70bps y-o-y and up 50bps q-o-q, while CIB's cost of risk ratio was down 80bps y-o-y and up 90bps q-o-q. On a nine-month basis, Banking Business cost of risk ratio was 2.0% in 9M18, down 20bps y-o-y, primarily driven by 30bps y-o-y improvement in RB's cost of risk ratio, partially offset by 20bps y-o-y increase in CIB's cost of risk ratio. The Banking Business cost of risk ratio adjusted for the 3Q18 currency depreciation impact stood at 2.0% in 3Q18, flat y-o-y and up 30bps q-o-q. Q-o-q increase in FX adjusted cost of risk was primarily driven by increased cost of risk in the express and micro loan portfolios

§ Quality of our loan book remains strong in 3Q18 as evidenced by following closely monitored metrics:

§ BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 3.0mln in 3Q18 (down 19.5% y-o-y and up 49.2% q-o-q) and GEL 7.3mln during first nine months of 2018 (up 9.7% y-o-y); BNB's earnings were positively impacted by decreased levels of cost of credit risk in 3Q18 (down 68.9% q-o-q) and 9M18 (down 56.4% y-o-y)

§ BNB's loan book reached GEL 394.7mln at 30 September 2018, up 3.8% y-o-y and largely flat q-o-q, mostly reflecting an increase in consumer loans. Client deposits were GEL 363.2mln at 30 September 2018, up 14.8% y-o-y and up 22.0% q-o-q

§ BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. At 30 September 2018, total CAR was 14.7%, above the 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 9.5%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") was 15.2% in 3Q18 (21.1% in 3Q17 and 10.8% in 2Q18) and 12.8% in 9M18 (13.1% in 9M17). Strong capitalisation and profitability allowed BNB to distribute dividend in the amount of GEL 1.2mln in 1Q18 (GEL 1.2mln in 2017)

§ Overall, profit before non-recurring items and income tax totalled GEL 117.1mln in 3Q18 (up 15.7% y-o-y and down 2.5% q-o-q) and GEL 348.3mln during first nine months of 2018 (up 23.5% y-o-y), while ROAE11 was 25.8% in 3Q18 (25.1% in 3Q17 and 25.2% in 2Q18) and 25.7% in 9M18 (24.3% in 9M17)

§ Net non-recurring items. Net non-recurring expenses amounted to GEL 50.7mln in 9M18 (GEL 4.1mln in 9M17), primarily comprising of 2Q18 demerger related costs. Please see 2Q18 and 1H18 results announcement for details

§ Income tax expense. Income tax expense amounted to GEL 8.8mln in 3Q18 (GEL 7.9mln in 3Q17 and GEL 27.5mln in 2Q18) and GEL 45.3mln during first nine months of 2018 (GEL 15.5mln in 9M17). The significant y-o-y increase in income tax expense in 9M18 was primarily driven by the one-off impact of changes to the corporate taxation model applicable to financial institutions which was amended in June 2018. Please see the 2Q18 and 1H18 results announcement for details

Our balance sheet remains highly liquid (NBG Liquidity ratio of 32.5%) and strongly capitalised (NBG Basel III Tier I ratio of 11.0%) with a well-diversified funding base (Client Deposits and Notes to Total Liabilities of 62.7%).

11 2Q18 and 9M18 ROAE adjusted for demerger related expenses and one-off impact of re-measurement of deferred tax balances

§ Liquidity. Liquid assets increased to GEL 4,696.8mln at 30 September 2018, up 15.5% y-o-y and up 10.1% q-o-q. The y-o-y growth was largely driven by an increase in local currency bonds, which are used by the Bank as collateral for short-term borrowings from the NBG, and additional proceeds as a result of the demerger-related pushdown of $350mln Eurobonds of JSC BGEO Group in March 2018. Management successfully continued to deploy excess liquidity, accumulated as a result of these proceeds. Q-o-q increase in liquid assets was primarily driven by the changes in minimum reserve requirements mandated by NBG since September 2018, whereby the foreign currency funds raised by local banks now carry an up to 25% reserve requirement depending on maturity. The NBG average liquidity ratio was 32.5% in September 2018 (44.4% in September 2017 and 30.2% in June 2018), above the regulatory minimum requirement of 30.0%. At the same time, the Liquidity coverage ratio was 113.6% at 30 September 2018 (129.8% at 30 June 2018 and 30 September 2017), well above the 100% minimum requirement level

§ Loan book. Our net loan book and finance lease receivables reached GEL 8,724.8mln at 30 September 2018, up 25.5% y-o-y and up 8.0% q-o-q. As of 30 September 2018, the retail book represented 69.6% of the total loan portfolio (68.4% at 30 September 2017 and 70.1% at 30 June 2018). While both local and foreign currency portfolios experienced y-o-y growth, the local currency loan portfolio demonstrated a strong increase of 27.4% y-o-y, partially driven by the Government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio 

§ Dollarisation of our loan book and client deposits. The retail client loan book in foreign currency accounted for 48.8% of the total RB loan book at 30 September 2018 (49.2% at 30 September 2017 and 45.8% at 30 June 2018), while retail client foreign currency deposits comprised 71.7% of total RB deposits at 30 September 2018 (71.6% at 30 September 2017 and 70.6% at 30 June 2018). At 30 September 2018, 81.7% of CIB's loan book was denominated in foreign currency (80.9% at 30 September 2017 and 80.2% at 30 June 2018), while 55.4% of CIB deposits were denominated in foreign currency (62.4% at 30 September 2017 and 50.7% at 30 June 2018)

§ Net Loans to Customer Funds and DFI ratio. Our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, remained strong at 94.9% (up from 90.0% at 30 September 2017 and slightly down from 96.9% at 30 June 2018)

§ Diversified funding base. Debt securities issued grew by 21.6% y-o-y and increased by 3.3% q-o-q. The y-o-y increase was driven by the above mentioned pushdown of $350mln Eurobonds from JSC BGEO Group in March 2018

§ Capital Adequacy requirements. Basel III Tier 1 and Total Capital Adequacy ratios stood at 11.0% and 15.9%, respectively, as of 30 September 2018, as compared to minimum required level of 9.9% and 14.9%, respectively (12.5% and 17.5%, respectively, at 30 June 2018, as compared to minimum required level of 9.9% and 15.0%, respectively). The reduction in the third quarter 2018 was attributable to the payment of the Bank of Georgia Group PLC's annual dividend to shareholders in July 2018

Discussion of Segment Results

Retail Banking (RB)

Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is itself represented by the following four sub-segments: (1) the emerging retail segment (through our Express brand), (2) retail mass market segment; (3) SME and micro businesses - "MSME" (through our Bank of Georgia brand), and (4) the mass affluent segment (through our Solo brand).